Thursday, October 20, 2011

How US Policy Helped to Corrupt the Egyptian Economy

By James V. Grimaldi and Robert O’Harrow Jr.The Washington Post
Thursday, October 20 2011

CAIRO — Beginning two decades ago, the United States government bankrolled an Egyptian think tank dedicated to economic reform. A different outcome is only now becoming visible in the fallout from Egypt’s Arab Spring.

Formed with a $10 million endowment from the U.S. Agency for International Development, the Egyptian Center for Economic Studies gathered captains of industry in a small circle — with the president’s son Gamal Mubarak at the center. Over time, members of the group would assume top roles in Egypt’s ruling party and government.

Today, Gamal Mubarak and four of those think tank members are in jail, charged with squandering public funds in the sale of public resources, lands and government-run companies as part of a dramatic restructuring. Some have fled the country, pilloried amid the public outrage over insider deals and corruption that toppled President Hosni Mubarak.

“It became a crony capitalism,” Magda Kandil, the think tank’s new executive director, said of the privatization program advocated by its founders. Because of the corruption, the center now estimates, the assets that Egypt has sold off since 1991 have netted only about $10 billion, $90 billion less than their estimated worth.

The privatization saga is a cautionary tale about the power and perils of U.S. foreign aid — most notably the nearly $8 billion that the United States has provided to Egypt since the 1990s to push the country toward economic reforms.

Gamal Mubarak, 47, and the others deny any wrongdoing and are fighting corruption charges filed by the new Egyptian government, saying they have been trumped up to placate street protesters calling for retribution. The defendants also assert that the deals were legal under existing laws.

But the arc of the American-backed privatization effort in Egypt recalls years of questions from critics about the transparency and effectiveness of the more than $70 billion in military and economic assistance to that country over the past six decades, the most aid given to any country other than Israel.

Although U.S. officials have not publicly raised questions about the funding to ECES, as the economic think tank is known, they expressed concerns in confidential cables that privatization efforts could lead to high-level corruption, according to a review of hundreds of WikiLeaks documents by The Washington Post.

“The privatization and economic opening of recent years have created new opportunities for ‘vertical corruption’ at upper levels of government affecting state resources,” said one confidential State Department cable written by an unidentified diplomat in 2006, quoting Hitler Tantawi, a former chief of an internal government financial watchdog called the Administrative Control Authority.

Officials at USAID declined to discuss their support of the Egyptian think tank, privatization efforts in the country or the sentiments shared in the confidential cables.

In a statement, the agency said it took measures to ensure that the grants to ECES were properly used. “ECES is a reputable think tank and research center that has produced many valuable economic research papers over the last 20 years,” the agency said.

The path to privatization

Since the 1970s, USAID has provided billions of dollars in economic help to Egypt in exchange for promises of liberalization of the socialist economy created in the 1950s by President Gamal Abdel Nasser.

Despite those promises, Egypt’s privatization initially moved at a glacial pace, in part because Hosni Mubarak’s tenuous hold on power made him reluctant to risk pushing against popular opposition.

By the end of the 1980s, the public sector still constituted more than half of Egypt’s industrial production and 90 percent of its banking and insurance industries. At least 20 percent of the workforce was in the public sector.

But the picture began to change in the early 1990s, after a financial crisis in Egypt, when international lenders said they were no longer willing to float an economy so dependent on state-run enterprises.

In exchange for bailouts, Egypt agreed to make the types of structural reforms that were sweeping the planet after the collapse of Soviet communism. Policymakers envisioned the market pulling the masses out of poverty, as well as spurring a middle class and ultimately democratic reforms.

The worldwide effort came to be called “the Washington Consensus.”

In Egypt, privatization had a powerful champion in Gamal Mubarak.

He was a graduate of the American University of Cairo and began his career as an investment banker at Bank of America in London. Gamal and his older brother, Alaa, founded Medinvest, becoming capitalist converts and earning a fortune by buying and selling Egyptian debt, according to allegations by Egyptian prosecutors.

As Gamal Mubarak became more deeply involved in public life, he moved toward the Washington Consensus with a single-minded commitment.

He had an ally in an ambitious lawyer named M. Taher Helmy, who helped draft legislation in 1991 that authorized Egypt’s privatization program, with a plan to privatize more than 350 companies worth $104 billion.

A year later, Mubarak teamed up with Helmy to create the Egyptian Center for Economic Studies to promote market reforms through books, policy papers and conferences. The center’s primary source of revenue came from the $10 million endowment from USAID.

Some privatization deals occurred in the 1990s. But meaningful change, involving major government assets, came only after Gamal Mubarak and fellow reformers gained control of the National Democratic Party, the ruling party of Egypt. Then the reforms came in a cascade of new policies and laws, many of them based directly on the papers produced by the U.S.-funded ECES.

In 2002, Mubarak formed the party’s powerful policies committee. Following his lead, the party’s general assembly quickly appointed other ECES members to the committee, including Helmy, who was the think tank’s chairman at the time.

In a speech promoting “new thinking,” Mubarak said that economic growth must come “through the perfect application of free-market principles.” The rhetoric came straight out of ECES policy papers.

Privatization deals came quickly. In 2003, Egypt privatized nine companies worth about $18 million. In 2005 and 2006, the number of deals soared to 59, worth $2.6 billion.

The changes appeared to benefit the overall economy in Egypt, as the gross domestic product doubled and growth hit 7 percent. But behind the scenes, American diplomats warned of potential trouble.

U.S. Ambassador Frank Ricciardone wrote in a classified embassy cable in early 2006 that the interests of “high-level members” of the political party and Hosni Mubarak’s regime could pose a risk to reform. “Corruption also remains a significant impediment to growth, and may become more difficult to control as economic reform progresses,” he wrote.

But finally, privatization was in full throttle — with ECES in the center of the action.

Insiders benefit

Some of the privatization deals included the titans of business involved in ECES. And some of them were handled by Helmy’s firm. They included Egypt’s $1.6 billion sale of the National Bank of Alexandria and the $892 million sell-off of Telecom Egypt.

“ECES was simply in the right place at the right time,” Mahmoud Mohieldin, then chairman of the National Democratic Party’s economic committee and a key figure at ECES, told Bruce Rutherford, a political scientist at Colgate University, for a book,“Egypt After Mubarak.” “It had a set of proposals already on hand that harmonized with where the government wanted to go.”

Under Helmy’s leadership, the Cairo office of the giant Chicago-based international law firm Baker & McKenzie handled more than $3 billion of the privatization deals, including the government’s sale of assets, companies and land, according to information on the firm’s Web site, news releases and news accounts.

The firm has represented the government in deals and helped private-sector companies acquire government-run enterprises.

Helmy has long maintained that he was working to benefit the nation.

“We help because it’s our duty as Egyptians,” he told the publication Business Today Egypt in 2004. “We want to help the country advance by drafting legislation to match the fast development of economic policies.”

Among those who allegedly benefited from ties to ECES, Gamal Mubarak and the privatization effort was Ahmed Ezz, a founding member of ECES and a leading member of parliament and the former ruling party. Once known as the “steel king,” Ezz built the state-owned Alexandria National Iron and Steel into the largest steel producer in the Middle East, with more than 7,000 employees. Helmy’s firm handled the transactions for Ezz Steel.

In 1998, with the company facing bankruptcy, Ezz began buying shares, with help from then-Minister of Industry Ibrahim Salem Mohamadein. Prosecutors allege that he made more than $1 billion in inappropriate profits over the next decade as he acquired more than half of the state-run company’s shares.

Ezz also benefited from laws written and pushed for by ECES colleagues and privatization advocates, who also served with him on the National Democratic Party’s policies committee or in the government, according to a recent study by the German Marshall Fund of the United States.

In 2004, for instance, a law first drafted by Helmy slashed the corporate tax rate to 20 percent, leading to a windfall for Ezz’s steel empire.

The next year, Helmy had a hand in writing a competition law that appeared to buffer Ezz’s business from allegations of operating as a monopoly.

In September, appearing in a courtroom in New Cairo, Ezz told a three-judge panel, “I am not guilty, and all of the allegations are not supported by law and are against common sense.”

Another ECES member who partook in the privatization boom was Ahmed al-Maghrabi, a property developer who became Egypt’s housing minister. Palm Hills Developments, a joint venture owned by Maghrabi and his cousin, built a development of “luxurious villas” in 6th of October City, off highways leading to the port city of Alexandria, according to the development’s Web site.

‘Bizarre’ deal

The offices of ECES are on the eighth floor of the granite-clad Nile City Towers complex, a premier business address in Cairo that includes global brand names such as Procter & Gamble, Motorola and American International Group. The corner office at ECES, now occupied by Kandil, the new executive director, has a commanding view of the Nile River.

One recent day, Kandil pulled out the galleys for a new book — one that was so controversial among the board that its publication was not approved until after the revolution. She flipped to a page that cites statistics showing that the sale of Egypt’s public assets had recouped just one-tenth of their true value over the 20 years since the program began.

The sales prices were $9.6 billion, or about 1 percent of Egypt’s gross domestic product. The assets’ true value was $104 billion, according to Kandil.

“Some of the privatization deals were bizarre,” said Kandil, an American-trained Egyptian economist who has a PhD from Washington State University and was hired by a search committee headed by Helmy.

“The results benefited those who oversaw the process,” she said.

Five people closely affiliated with ECES — members, directors or founders — have been charged in the corruption investigations launched since the revolution. In addition to Gamal Mubarak, they include Ezz, Maghrabi and officials who had served as the ministers of housing and trade. (Ezz was sentenced last month to 10 years in prison after being convicted in a scheme involving the illegal sale of steel licenses.)

ECES has suspended Mubarak’s and Maghrabi’s memberships until their cases are resolved, and Ezz was removed from the membership because he had not paid his dues, Kandil said. (Egyptian prosecutors this week said they have evidence suggesting that Mubarak and his brother deposited hundreds of millions in foreign bank accounts, including $340 million in Switzerland.)

Kandil said Helmy, who chaired ECES last year, was asked to step down. She said she last saw him before the January revolution, when he said he was going on a business trip. But Kandil said he has told her since that he has no immediate plans to return from the United Kingdom, where he lives now with his wife and his three school-age children.

“I’m sensing,” Kandil said, “he is not very hopeful about coming back.’’

Helmy, who has not been charged in the corruption cases, is still listed as head of Baker & McKenzie’s Cairo office in the Nile City Towers. He declined a request for an interview. A spokesman for the firm said: “Mr. Helmy continues to be actively practicing and managing our firm’s Cairo office. He has not permanently relocated to our London office.”

Kandil emphasized that ECES’s board troubles should not cloud the center’s solid work.

She said Egypt’s leaders did not follow the center’s policy positions calling for robust regulation and laws.

“There is a role for government in the business of regulation,” Kandil said, “and making sure there is a level playing field to restrain the greed.”

O’Harrow reported from Washington. Research editor Alice Crites and special correspondent Ingy Hassieb, in Cairo, contributed to this report.